An Assessment of U.S. Manufacturing Competitiveness and the White House 100-day Supply Chain Review

I. A recap of manufacturing in the U.S.

Covid-19’s impact on industry has laid bare American exposure to strategic supply chain disruptions. In February the U.S. White House ordered a 100-day strategic supply chain review to help understand where industry requires support in national interests. In parallel, stories across media and politics tell a story of U.S. manufacturing decline. But are these stories a realistic description or is it clickbait to gain attention? We’ve taken a dive deep into the macroeconomic data and talked with people like Federal Reserve economists Kevin L. Kliesen to better understand the real landscape of U.S. manufacturing.

American manufacturing output has grown strongly over the years. Today the U.S. manufacturing output is twice what it was 30 years ago. And manufacturing’s proportion of the growing U.S. GDP has been relatively constant, hovering about approximately 12% of GDP over the last 15-20 years. This is remarkable when one considers the rise of service industries’ percentage contribution to GDP with the internet boom.

But labor participation in creating that output has declined as a result of increased worker efficiency and a higher level of technology and automation. According to the World Economic Forum, U.S. workers’ productivity increased by 72% since 1979. In addition, the Brookings Institute states that among the top five countries in global manufacturing output, the U.S. has the highest output per worker.

This sharp rise in labor productivity in American manufacturing has come with profound advantages but also painful social upheaval and trepidation for many who used to work in the industry. Despite this, the overall economic picture is positive and suggests the U.S. is currently well positioned in the global competition for manufacturing strength.

The American manufacturing story has always been about innovation and efficiency – making the most out of every machine, every invention, every worker, and every hour. As we look ahead, the U.S. should seek to maintain this edge not by looking to the past, but by imagining the future and building the skilled talent pool and technology to maintain a manufacturing leadership position.

II. Theory of comparative advantage taken too far?

If the U.S. is so great at manufacturing, why did COVID disrupt everything, and why did the U.S. government order an unprecedented supply chain review? In the tightly interconnected world supply chain, the production of products might involve as many as a dozen countries. But not all of them add the same value to the product along the way. The difference is usually due to variations in the technology and sophistication of each country’s manufacturing base. A good example would be a Nike t-shirt that has “cool-technology” fabrics that are designed in the U.S., woven in China, and sewed in Bangladesh. Among the three steps, the R&D of the fabrics involve the most sophisticated technology and captures the most value for about 40% of the total production cost of the clothing. The weaving process in China requires efficient mass production at low cost. At the bottom, sewing requires the most labor and thus is offshored to Bangladesh where has a huge labor arbitrage. Sewing represents only 3-5% of the value-add.

In this way, the U.S. has been outsourcing basic and low value-add production to other places for decades. Countries and companies shifted from being vertically integrated to being horizontally integrated. The global system became hyper-efficient as each country and company focused on its own comparative advantage. But a massive trade-off was silently being made; the more efficient, the less resilient and more prone to disruption. In the past year, the U.S. has discovered it didn’t have the ability to produce the most basic medical protective equipment when it needed it most, didn’t have enough semiconductor manufacturing capacity to satisfy demand, not enough plastic resin, lumber, labor – and the list goes on.

In February 2021 the U.S. White House ordered all agencies of the Executive Branch to undertake a 100-day strategic supply chain review to identify exactly what level of supply chain resilience is required. The report, published on June 8^th, 2021, suggested the following steps and actions for U.S to strengthen resilience and maintain advantages in the U.S. supply chain.

1. Immediately support domestic production of critical medicines; the U.S. is “critically dependent” on imports for key pharmaceutical products.
2. Create an end-to-end domestic supply chain for advanced batteries with a 10yr horizon and a $17B loan authority to start.
3. Jumpstart U.S. domestic mining and refining of critical raw materials. The report recognizes that the world has ceded too much refining capacity for minerals to China.
4. Semiconductor supply chain resilience to be addressed via stronger partnerships with Korea and Japan to reduce reliance on Taiwan and China. $50B domestic funding line to help boost internal capability as well.
5. Labor training and apprenticeship push: $100M allocation to start.
6. Stronger requirements coming for all U.S. government procurement ($600B annually) to “Buy American.”

The U.S. government push will rely on a host of funding mechanisms to pursue these goals, which represent a government admission that offshoring has gone too far, and certain supply chains need to be partially or fully restored to the U.S.

But this should not be understood as reshoring all manufacturing. The prosperity of U.S. manufacturing sector will still benefit greatly from the efficiency brought by international division of production. Globalization is here to stay, but the “black swan” events of 2020 and 2021 will force companies to explore reshoring and could lead to governments picking domestic “winners” for subsidized local manufacturing. Specifically, the future destination of basic and low-cost manufacturing for U.S. manufacturers will increasingly be nearshore places like Mexico. 

III.What comes next?

Efficiency or resilience? Offshore or reshore? These are the questions for many industry leaders as the pandemic-related issues complicate US’s reliance on its supply chain for basic goods. Leaders from industry and government are starting to realize strengthening the supply chain and industry takes more than each player maximizing his or her own benefit (i.e., offshoring decrease cost for a company but can decimate the local industrial commons) but requires an overall view to increasing cooperation and coordination among different companies, researchers, and local workforce.

To keep America’s advantage in the high value-add manufacturing, U.S. manufacturers will rely on a wholistically designed system to guide them and connect the research and development to the final commercialization. A good example of a program with this holistic mindset is the SBIR fund program, sponsored by Small Business Administration. The program not only provides funding in the R&D stage, seeking potential of commercialization and commercialization of the product but also guidance for the smaller business. We believe the same logic will be applicable to bigger American manufacturers, especially under the background of global competition in pushing the scientific limits and marching into the next generation of manufacturing. After all, the next ground-breaking innovation will very likely to come from the more established corporations.  

Besides, keeping the US’s advantages in high value-add manufacturing, it is also critical to identify basic manufacturing that has great social implications and essential for the supply chain. Pharmaceuticals and facemasks are good examples of the ‘small but essential’ type of manufacturing. Only when consideration of resilience is throughout the structure to the level of the tiniest part can a colossal ship sail far on the ocean.

Finally, apart from high-level research, it is important to direct resources to basic education and training. By investing in basic education, specifically STEM education, the US can ensure the continuity and sustainability of talents for future research. Also, the US can reinvigorate the industrial commons by providing training and skills session to the corresponding workforce because the skilled labor, even in the automation age will be a precious asset for a company.